South Africa’s financial institutions come under fire for failing to bankroll technology ventures, writes Lynda Loxton
SOUTH AFRICA’S financial institutions are facing increasing criticism because of their perceived timidity in funding non- traditional industries that could strengthen the country’s technological edge.
Such is the frustration in some sectors that special initiatives are being planned to educate banks about the possible long- term rewards of these high-risk investments.
This lack of innovation and unwillingness to take risks is blamed on a variety of factors, not least being the siege economy developed during the apartheid era when self-sufficiency in a basic range of industries rather than hi-tech development on a world-class scale was the norm.
The problem was highlighted recently in the cluster initiative study into the plastics, chemicals and specialty chemicals sectors organised by the directorate of chemical and allied industries of the Department of Trade and Industry.
Various working groups have been established to examine different aspects of developing the upstream and downstream sectors of the industry and they are due to report back at a plenary session next week.
But the issue of finance looms large in preliminary reports issued in the latest issue of Cluster News, a departmental newsletter.
While upstream plastics and chemicals companies such as Polifin and Sentrachem will, because of their sheer size, have little difficulty in attracting financing, it is the smaller, downstream plastics and chemical-converting industries that face the most difficulty.
Cluster News said this was because of a “lack of understanding of downstream industries by banks” and it has been recommended that a “communication exercise” be launched to improve banks’ “understanding of the industry and thereby reduce their perception of riskiness of the industry”.
Another reason why banks could be reluctant to fund individual small downstream processors could be Usury Act limits on maximum interest rates that banks could charge.
“The maximum may well be too low to justify the risks in certain cases, thus locking these ventures out of bank finance,” it said.
One way out of this could be to set up some form of fund to insure the risk, “perhaps with the backing and industry knowledge of the larger upstream companies”.
The lack of flexible financing from banks did not mean that no funding was available, however. The Small Business Development Corporation, Industrial Development Corporation and the government provide various forms of support and the working group suggested these should be more widely publicised.
Both small and large operators suffered from several other financial disincentives, not least being the secondary tax on companies, high interest rates and exchange controls.
Financial problems were also identified in another study as being one of the biggest constraints to the development of new industries. In a paper for the University of Cape Town’s Trade Monitor, researcher Rosemary Wolson said that one possibly exciting new industry in South Africa could be biotechnology.
But the cost of entry “is high and traditionally conservative South African investors are deterred by the long-term nature of biotechnology research and the high risks associated with it”, she said. “The misconceptions surrounding the field also make it difficult to attract funding.”
As a result, this area had largely been ignored, despite the fact that South Africa had the infrastructure, cheap sources of power and wealth of genetic resources that could make biotechnology industries leading players in their field.
The position was exacerbated by the fact that the government had no policies to develop biotechnology or to attract the kind of international strategic partners that would be important in giving the industry credibility and access to new technology.
Wolson said the potential of biotechnology industries to promote small-scale industries, export niche products and strengthen trade and other links with African countries was highlighted in one true case study she had come across.
In this case, a willing interested partner who saw the long-term profitability of biotechnology offered the use of his offices, a basic salary and tools to a scientist with a PhD in Microbiology. The aim was to give the scientist a chance to determine the market for tissue culture and micropropagation techniques.
“This is a mutually beneficial arrangement that sees the scientific and technical input of the science partner balanced by the venture capitalist’s contacts, skills and business expertise,” she said.